Las Vegas’ battered commercial real estate market is showing signs of life but remains a long way from full recovery.
Last year, investors snapped up properties, landlords signed new tenants, industrial buildings sprouted and developers pushed ahead with big retail projects.
Much of the same is expected this year, although the valley still faces big obstacles. Lease rates are low, vacancy rates are far above the national average, and despite some notable projects, development is relatively limited. New businesses are moving to Las Vegas and taking over empty real estate, but most local companies aren’t expanding and don’t need additional space.
And the valley’s unemployment rate remains high. In November, it was 8.6 percent, well above the 6.6 percent national average.
What more is in store for 2014? Here is a look at how the office, retail, apartment and industrial sectors might fare:
Despite meager improvements last year, Las Vegas still has one of the worst office markets in the country.
The city had a 21 percent vacancy rate during the fourth quarter of 2013, down slightly from 22 percent a year earlier, according to brokerage firm Colliers International. Research firm Reis Inc. put the valley’s fourth-quarter vacancy rate at 26 percent, the second-highest in the country.
In 2005, during the boom, the rate was 8 percent.
The average asking rent was $1.87 per square foot last quarter, unchanged from a year earlier, Colliers said.
The market is far from dead, though.
The Blackstone Group, a Wall Street powerhouse, bought the 68-acre Hughes Center office park for $347 million last year, Allegiant Air’s parent company bought five empty office buildings in Summerlin for new headquarters, MGM Resorts International leased 230,000 square feet of space near McCarran International Airport, and Barclaycard US, owned by British banking giant Barclays, rented 91,300 square feet in Green Valley for a call center.
Brokers predict that older office buildings in Las Vegas’ inner core will continue to struggle with high vacancy rates and basement-low rents, while younger properties near freeways on the city's outer rings should do better.
CBRE Group broker Brad Peterson said he expects to see fewer landlord concessions this year and a slight bump in rental rates at well-located buildings. Desperate landlords across the valley have been offering free rent and upgrades to try to lure tenants. Vacancy rates also could nudge lower, largely because more call centers might set up shop, Peterson said.
During the recession, Las Vegas’ retail sector was decimated by foreclosures, bankruptcies and mothballed projects as shoppers stopped spending and stores emptied out.
Today, well-located retail centers are getting more tenants and construction projects are moving ahead, but rental rates remain stagnant.
The valley’s fourth-quarter vacancy rate for anchored shopping centers was 9.3 percent, down slightly from 9.7 percent a year earlier, according to Colliers. Asking rents were $1.36 per square foot last quarter, the same as a year ago.
Meanwhile, developers are working to complete several large, delayed projects in or near Summerlin.
The Howard Hughes Corp. is developing the Shops at Summerlin, a 1.6 million-square-foot retail and office complex that was mothballed by previous owners but now is expected to open this fall. EHB Cos. broke ground last year on a 220,000-square-foot retail center that originally was supposed to open last year but now is slated to open this fall, as well. IDB Group USA broke ground last year on the second phase of Tivoli Village, an upscale retail and office complex. The new section is expected to open in spring 2015, years behind schedule.
Investors are buying existing centers, as well.
“Pretty much any property that goes on the market for sale as an investment has a lot of competitive bidding,” Sun Commercial Real Estate owner Cathy Jones said.
Retail sales have been climbing steadily in Clark County as tourists and locals spend more money on food, clothes, cars and other consumer goods.
Still, Nevadans have some of the worst personal finances in the country, and the mini-spending boom has raised fears that locals once again are taking on too much debt and returning to the bad habits of the boom era — buying stuff they can’t afford.
Foreclosures and other financial woes have made it impossible for many Las Vegans to buy a house. But the turmoil has helped make the valley’s apartment market one of the better-performing sectors of commercial real estate.
During the fourth quarter last year, the apartment vacancy rate was 5.3 percent, with average asking rents of $819 a month, according to Reis. Two years earlier, the vacancy rate was 7.5 percent, with average rents of $774 per month.
Investors are gobbling up properties. ST Residential sold Juhl and the Ogden, two downtown high-rises, along with One Las Vegas, Loft 5 and the Spanish Palms Condominiums for $237 million last month to New York’s Dune Real Estate Partners and KRE Capital of Beverly Hills, Calif. Also last year, the Wolff Co., of Scottsdale, Ariz., bought 14 apartment complexes for $200 million from Houston’s Camden Property Trust and New York’s DRA Advisors.
“There’s tremendous interest,” said broker Perry White, of Marcus & Millichap Real Estate Investment Services. "We’ve got buyers we can line up from here to Primm."
White predicts investment sales to rise this year, but the economy is too wobbly for landlords to charge big rents. Rates are rising locally, though not nearly as fast or as high as in other, healthier markets.
Landlords face increasing competition from rental homes, a sector that grew rapidly in recent years as investors bought cheap houses in bulk to rent out. According to Reis, the valley’s fourth-quarter apartment vacancy rate was 65th-highest out of the 79 markets tracked.
What’s more, some apartment complex owners who want to sell are holding out for bloated boom-era prices, which aren't likely to return anytime soon.
“That price is imprinted on their brain,” White said. “It’s just not the same market.”
New warehouses and distribution centers flooded the valley during the boom, many without tenants lined up. But construction practically ground to a halt during the recession.
Last year, the hard hats got back to work.
Casino supplier Shfl Entertainment built a 130,000-square-foot headquarters, data-center operator Switch was building a 600,000-square-foot facility, food distributor Chelten House Products worked on a 110,000-square-foot project, and FedEx Corp. broke ground on a 300,000-square-foot distribution center.
Overall, there weren't too many of those projects valleywide, and they were built largely because Las Vegas has a glut of small industrial buildings and not enough big ones available. Still, the construction is a sign of recovery.
The sector’s fourth-quarter vacancy rate was 11.5 percent, down from 14.2 percent a year earlier, according to Colliers. John Stater, the Las Vegas research manager for Colliers, predicts it could drop below 10 percent this year.
Speculative construction could even return in 2015, he said. But as of now, rental rates are too low to justify those projects.
Average asking rents last quarter were 52 cents per square foot, up from 49 cents a year earlier.
Chart by Kyle B. Hansen. Source: Colliers International.